Direct Taxation: The European Commission
proposes an EU co-ordinated approach on relief for losses incurred in other
Member States (cross-border loss relief)

In the framework of an EU-coordinated approach in
direct taxation (IP/06/1827),
the European Commission invites Member States to explore ways of allowing
companies to set off losses incurred in other Member States. In most Member
States, domestic losses may be set-off against other profits in the same Member
State. However, there is only limited availability for such relief for losses
incurred in other Member States. The lack of cross-border relief for losses in
the Member States' legislations creates a barrier to entering other markets and
therefore undermines the international competitiveness of European companies.
The Communication examines several solutions aiming at removing these
obstacles.

"No company shall refrain from investing in another Member States for the
simple reason that losses from domestic investments are immediately taken into
account, whereas losses incurred in another Member State are excluded from such
relief" said Taxation and Customs Commissioner László Kovács.
"Especially Small and Medium Enterprises will more easily extend their
activities to other Member States and reap the full benefits from the internal
market."

Lack of availability of cross-border loss relief impacts on
competitiveness

Relief for losses resulting from investments within the EU is generally
limited to the amount of profits generated in the same Member State in which the
investment is made. The lack or limited availability of cross-border loss relief
results in distortions in business decisions within the internal market.

These distortions lead to less efficient companies and represent a major
impediment to the emergence of more competitive EU firms on the world market.
This also compares unfavourably with the USA, where the federal tax base is
larger than that of any individual Member State and loss relief is provided for
any investment made anywhere in the USA.

Solutions proposed by the Commission

A lack of cross-border loss relief leads to a situation where losses become
stranded in different entities. This leads to "overtaxation", since other
profitable entities will be taxed on their gross profits without a taking into
account of the losses.

The Communication therefore suggests ways in which Member States may allow
the cross-border relief of losses which are sustained either:

within a company (i.e. losses incurred by a branch or "permanent
establishment" of the company situated in another Member State);

within a group of companies (i.e. losses incurred by a group member in
another Member State).

The Commission urges Member States to
explore ways of allowing companies to set off losses incurred in other Member
States. The response should be coordinated in order to maximise the benefits for
the internal market and reduce unnecessary duplication of effort in the 25 (soon
27) Member States.

Background

In its Communication "Towards an Internal Market without tax obstacles" from
October 2001 the European Commission identified the lack of cross-border loss
relief as one of the most important obstacle to cross-border activities. Within
the framework of the two-track strategy, the Commission committed itself to
address the issue by a "targeted measure" in the short- to medium-term. In the
longer-term, it would work towards providing companies with a Common
Consolidated Corporate Tax Base (CCCTB) to deal with the tax obstacles
comprehensively. After the introduction of the CCCTB, a targeted measure for
cross-border loss relief would be complementary for all situations, where, for
example, certain types of companies are not covered by the scope of the
CCCTB.

The issue of cross-border loss relief has gained widespread attention by the
judgement from the European Court of Justice in the "Marks &
Spencer"[1] case rendered in
December 2005. In this decision the Court obliges, under certain conditions, the
Member State of a parent company to grant relief for definitive losses of a
subsidiary established in another Member State.

More information on the tax treatment of losses in cross-border situations is
available on the Europa internet site: